Introduction:
All registered companies such as one-person companies, private limited company or limited companies are mandated to maintain a book of accounts and get it audited as per the Companies Act of 2013. Hence, after a company is incorporated, the Board of Directors needs to appoint an auditor. The Registrar of Company needs to have all requisite information relating to the auditor in Form ADT-1. First auditors are to be appointed within thirty days of the company’s registration. If this is not done, they can be appointed by shareholders within ninety days after incorporation.
After the establishment of the Companies Act, 2013, a change was noticed in the process and responsibility of filing Form 23B and appointing an auditor with the registrar of companies. Previously, after receiving an appointment letter from the company, the auditor had to file Form 23B within a period of thirty days. However, now, after the company informs the auditor of his appointment, they have to file the notice with the registrar of companies within fifteen days. Furthermore, the burden of filing Form ADT-1 has been given to the company instead of the auditor. The previous time period of thirty days for filing the Form ADT-1 has been changed to fifteen days from the date on which the auditor was appointed. This article illustrates the various provisions relating to the appointment of an auditor.
Section 139 of the Companies Act
Section 139 can be considered to be a code in itself that relates to the appointment of auditors. As per the guidelines every appointed auditor is to hold office for a period commencing from the conclusion of the annual general meeting till the end of the sixth annual general meeting. Rule 3 speaks of the procedure and manner of selection of auditors. Sub-section (1) does not provide for the appointment of auditors in any other manner and hence starts with “subject to the provisions of this chapter”. It also consists of four provisos. Though a proviso may be substantive in itself at times, it generally exists to carve out a particular class from the main provision. The phrase “Notwithstanding anything contained in sub-section (1)” is found at the beginning of Sub-sections (5) and (6) of Section 139. The Supreme Court has opined that a non-obstante clause is in essence a legislative device that is used to give an overriding effect to a particular provision over another provision that is contradicting it and also to limit the effect of any contradictory provisions. It is hence clear that sub-section (5) and (6) have been given an overriding effect over sub-section (1).
Sub-section (5) of Section 139 provides that the sole power of appointing auditors in cases other than that of first auditors in government companies lays with the Comptroller and Auditor General of India. Sub-section (6) of this Section mandates that an auditor needs to be appointed within thirty days by the Board failing which, it is the duty of the Board to intimate the members of this default. Consequently, the members need to appoint an auditor within ninety days from the day on which they are informed who is to hold office till the end of the first annual general meeting. It is laid down by sub-section (7) that when the Comptroller and Auditor General of India appoint the first auditor of a company within sixty days from the date on which the company is registered, he is to hold office till the annual general meeting concludes. Sub-section (8) provides for filling casual vacancies. The provisions regarding the reappointment of a retiring auditor are enshrined under sub-section (9) of Section 139 which are- (i) he is not disqualified, (ii) he has not given a notice to the company stating that he is unwilling to be appointed again and (iii) no other special resolution has been passed appointing someone else as an auditor or he has not been expressly disqualified.
Section 140 of the Companies Act
Section 140 of the Act provides the process to be followed for the resignation or removal of an auditor of a company. Sub-section (1) states that an auditor may be removed from office before his term expires by a special resolution and approval of the central government. Sub-section (2) provides that a statement in the prescribed format needs to be furnished within thirty days, by the auditor who has resigned, addressed to the Registrar and company. He can be penalized with a fine if he fails to comply with the above mandate under Sub-section (3). Sub-section (4) provides for the appointment of an auditor other than one who is retiring and states that for such a resolution a special notice is required at the Annual General Meeting. Sub-section (5) of the above section states that the National Company Law Tribunal may direct that a company change its auditors if satisfied that the auditor is guilty of collusion in any fraud or has committed fraud with regard to the company, the officers, or directors. Professional misconduct and fraud committed are dealt with under Sections 132 and 447 of the Act respectively.
Companies (Audit and Auditors) Rules, 2014
Rule 4 of the Company (Audit and Auditor) Rules of 2014 lays down the conditions relating to the appointment of the auditor and the notice regarding the same to the Registrar. Rule 4(2) states that the notice in question to the Registrar regarding the auditor’s appointment under Section 139(1) must be in Form ADT-1.
In the case of Basant Ram and sons v Union of India[1], the Delhi High Court laid down that an auditor who is to be removed from his post should be allowed to be heard in consonance to the Rule of Law which states that no one should be condemned unheard. Furthermore, for the removal to be effective, approval by the general body is needed. Being heard provides the auditor with the opportunity to put forth his stand and give clearing statements to the Court which in turn, enables the Court to do justice to all.
In the case of Deputy Secretary to the Government of India v S.N. Das Gupta[2], the Court laid down that it is the auditor’s duty not only to verify the arithmetical accuracy of balance sheets but also to question the substantial accuracy of such documents. Hence, an auditor was held guilty under Section 147 for non-performance of his duty under Section 143 when he failed to verify the cash balance which was claimed by the management and it was found to be much less than what was displayed in the books.
In the case of Institute of Chartered accountant v P. K. Mukherji and another[3], it was held by the Supreme Court that an auditor may place reliance on skilled persons in technical matters such as valuation of stock-in-trade and would not then be held liable for the work done by that person unless there were suspicions of something being wrong. This cannot however be used as a defense by the auditor and his duty cannot be converted into the work of a skilled person. Hence, in this case, the auditor was held guilty of professional misconduct and breach of duty when he failed to disclose an important part of the cash in hand as uncashed cheques to the beneficiaries of the provident fund.
In the case of Sasea Finance Ltd. v KPMG[4], the Court held that the auditor must report fraud being committed by an officer of the company to the management instead of waiting for the submission of the report when in a case such officer can continue defrauding the company by virtue of his post.
Form ADT-1
Form ADT-1 is an intimation form that is required to be filed to intimate the Registrar of Companies of the appointment of the auditor. This is a mandate by Section 139(1) of the Companies Act for every company to follow. This duty to file Form ADT-1 rests with the company, whether it be listed, unlisted, private limited, or public limited company. This form is to be filed within fifteen days from the annual general meeting wherein the auditor is appointed. The legal fees to be paid while filing the ADT-1 form are dependent on the share capital of the company. A delay in filing makes a company liable for additional fees which are dependent on the period of delay. Furthermore, if incorrect details are filed in the Form, corrected particulars need to be filed in the ADT-1.
The Form ADT-1 needs to be accompanied by other documents such as a copy of the resolution of the Company’s Board, written consent of the Auditor, and a certificate stating that the Auditor is not disqualified to be appointed as an auditor. A practicing Chartered Accountant is eligible to be appointed as the Auditor of a company. Also, before such appointment, it is to be made certain that Section 141 of the Companies Act is complied with and written consent and a certificate to that effect must be obtained from the Auditor. Once the Auditor gives his consent, the Board of Directors can execute a resolution to this effect. However, it is optional to file ADT-1 when appointing the first auditor. At every annual general the appointment of the auditor needs to be ratified by the members.
Conclusion
Audit of accounts is a sine qua non of a business. Auditors have several rights and corresponding liabilities. He possesses the right of access to the vouchers and book of accounts of the company. He is required to sign the auditor’s report and certify financial transactions or documents of the company which may have adverse effects on the working of the company. He needs to be present in general meetings and his remuneration is determined there. His duties include making a report of accounts to the company members and he can be held liable for compensation if it is found that he has made misleading or improper statements in the audit report or if he is guilty of wrongful, unlawful, or fraudulent conduct. The Comptroller and Auditor General of India appoint the auditor of a government company who acts as per directions given to them. An auditor is also needed to conform to auditing standards which are notified by the Central Government after consultation with the National Financial Reporting Authority. Furthermore, when a company winds up voluntarily, the auditor is needed to attach copies of audits of the Company. He is also mandated to report cases of fraud being committed by employees or officers of the company against the company, to the Central Government in a prescribed manner and time period.
References:
[1] 2000 (56) DRJ 491
[2] AIR 1956 Cal 414
[3] 1968 AIR 1104
[4] [2001] EWHC Ch 423
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